Kazuo Ueda Nomination As BoJ Chief A Harbinger Of Policy Shift

Friday saw an end to speculation and a twist in the saga of the candidate selection for the post of Bank of Japan Governor after Japanese media broke the news that Prime Minister Fumio Kishida’s government has picked Kazuo Ueda, a renowned economist and a former policymaker at the central bank, for the top job.

The Japanese yen surged on the news that came as a surprise as Masayoshi Amamiya, one of the two BoJ Deputy Governors who was widely seen as a continuity candidate, was expected to be named the successor to Haruhiko Kuroda. The yield on 10-year Japanese government bonds inched closer to the 0.5 percent limit that was set in December.

While markets saw the news of the expected nomination as hawkish, economists said the Bank of Japan Board is unlikely to be in a hurry to abandon its yield curve control and move away from its ultra-loose policy stance. Beyond that, a hike in the policy rate is likely a long way off.

Earlier this week, there was speculation that Amamiya was approached by the government for the BoJ chief post and yen weakened on the news as the dovish policymaker was expected to continue the central bank’s ultra-loose monetary policy that Kuroda had presided over for more than a decade.

Local media reported on Friday that Amamiya firmly refused to accept the top job.

Read more: Japan Govt Approaches Masayoshi Amamiya For BoJ Governor: Nikkei

Ueda, who is an economics professor at Kyoritsu Women’s University, would be the first candidate from the academia to become the BoJ Governor in postwar Japan, Kyodo news service said. The 71-year old monetary policy expert was a BoJ board member from 1998-2005.

During this period, Ueda voted against the BoJ interest rate hikes in August 2000, and he voted in favor of launching quantitative easing in March 2001, Capital Economics economist Marcel Thieliant pointed out.

While voicing some skepticism about the efficacy of monetary easing in the speeches he gave as a BoJ policymaker, Ueda argued that deleveraging, falling asset prices and low profitability were the main headwinds, the economist said.

“With credit growth accelerating, house prices surging and profit margins hitting record highs in recent years, those headwinds have all disappeared,” Thieliant added.

The government is also eyeing former Financial Services Agency chief Ryozo Himino and BoJ Executive Director Shinichi Uchida to fill the two positions for deputy governors, the public broadcaster NHK reported.

Read more: Bank Of Japan Maintains Yield Curve Control Defying Expectations

Even after these nominations, ING economists said the characteristics of the BoJ board remain dovish.

Ueda is unlikely to be expected to immediately change the BoJ’s policy stance based on his previous remarks, they said. In the past, he has warned against raising rates too early but has also argued that an exit strategy from the current ultra-easing framework is needed at some point in the future, ING economists pointed out.

“Therefore, we believe that the market will soon pay attention to incoming data – wage growth and inflation,” they added.

ING also said the appointment comes at a difficult juncture for financial markets as the US disinflationary trend comes into question, and the BoJ and Japanese markets will be hoping for a soft US CPI print next week or upward pressure on yields globally will likely resume, including in Japan.

Japan’s inflation hit a 41- year high of 4 percent in December, which is double the BoJ target of 2 percent. The rate stayed above the target for the ninth straight month.

Rising inflation has prompted calls for wage hikes to help the public cope with the consequent climb in the cost of living.

Kishida and Kuroda had urged companies to raise salaries as official data revealed that wages declined at the sharpest pace in 8 years in November.

However, nominal wages grew at the fastest pace in 26 years in December, boosted by one-off winter bonuses, and real wages rose for the first time since March.

Read more: Uniqlo Operator Fast Retailing To Hike Japan Salaries By 40%

BoJ Governor Kuroda’s current five-year term ends on April 8. He had first become the central bank chief in 2013.

His two deputies, Amamiya and Masazumi Wakatabe, are set to step down on March 19.

Former deputy governors Hiroshi Nakaso and Hirohide Yamaguchi were also widely seen as possible candidates to succeed Kuroda.

However, Nakaso announced last Friday that he accepted an Asia-Pacific Economic Cooperation, or APEC, advisory council post.

Nominations are expected to be tabled in the Japanese parliament Diet on February 14, Tuesday.

Both houses of the parliament have to approve the nominations, which should be a smooth sailing as the ruling coalition enjoys a strong majority.

Nominees for the BoJ top jobs are traditionally summoned to the parliament for hearings where they describe their views on monetary policy and answer questions from lawmakers. Hearings are likely to take place on February 24.

Bank of Japan’s new chief is widely expected to review the current inflation target of 2 percent under the policy accord with the government, which was crafted in 2013. The target would likely be made more flexible.

In the January policy session, the Bank of Japan left its yield curve control, a core pillar of the monetary policy, unchanged, defying expectations for a tweak in its ultra-loose monetary regime as the central bank spend trillions to safeguard the yield target.

Policymakers unanimously decided to maintain a negative interest rate of -0.1 percent on current accounts that financial institutions maintain at the central bank.

In the December policy meeting, the nine-member BoJ board had unexpectedly decided to expand the range of the 10-year JGB yield fluctuations to 0.5 percentage points from 0.25 percentage points.

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